Microsoft this week bought Skype for a staggering $8.5 billion, outbidding other suitors, and by most accounts paying around $3 billion more than the nearest rival bid. Its only response has been to have everyone ask the same question, ‘Did Microsoft pay too much? Now a huge weight of expectation lies on Skype, that it cannot possibly fulfill.
Obviously a company is worth what someone will pay for it, and wasting billions of dollars has been a forte of Microsoft’s for some time. At Faultline we can’t see why investors haven’t blanched at its strategy before and put in new management ‘ the current crop is reactive, lacks both innovation and confidence, and yet the company remains, for the time being at least, inviolate.
The commentators are right, it’s hard to imagine how Skype’s value has risen in the past year from the $2.5 billion valuation that it enjoyed when the company was bought out from under eBay, to the position this week when Microsoft agreed to pay $8.5 billion for it. Only in the context of Skype being embedded into an operating system, either tablet or smartphone or even PC, or all three, and partnered with a search engine like Bing, does it turn Skype into what some might consider a weapon against Google.
Google is the single most hated enemy of Microsoft, just ahead of Apple, and only when there is an obvious Google play does Microsoft lose its understanding of what money is worth.
Steve Ballmer stood in front of news cameras for the world’s press and said the combination of Microsoft and Skype will give it the competitive heft to combat Google Voice and Apple Facetime. This is of course patent nonsense.
Let’s imagine for a second that we are on the Microsoft team ‘ let’s try to justify the outlay. Well we might say that it could be integrated into all of our operating systems and devices such as the Xbox and any Windows phones to come out of WP7. We might say that, but the truth is that Microsoft has its own Instant Messenger, and it’s already been ported to handsets and sits inside all of its OS products. It offers a pure IP route on and off the device and this includes VoIP and can be used already for voice in Xbox, handsets and PCs.
We might argue that it is not so well architected and that it eats local processing power and needs remote switching servers, and that costs money. Okay Skype has a P2P architecture that eliminates server power, but Microsoft already knows how to build P2P, it’s not outside of its capabilities to take that step. And anyway Google Voice uses all of the colossal server power that Google has, which is probably why the voice quality and reliability of Google Voice is so much better than Skype.
We might also argue that Microsoft can integrate Skype with all of its enterprise apps and pay for the $8.5 billion in enterprise licenses. But the VoIP in its IM is already a standard for use in Enterprise, and additionally it has its Lync services, Live Meeting, Roundtable (video conferencing) and these all work with Office and Sharepoint services and the Microsoft Office Communication Server. They are all already integrated. All of this strategy is in place for the enterprise and it charges a small fortune for enterprise licensing for Live Meeting and other software, so why would it swap it for Skype and lose perhaps another $8.5 billion in lost revenues over the next few years. If Ballmer thinks that’s a way forward he’s mad.
And anyway these all use SIP (session initiation protocol) and Skype most definitely doesn’t. In fact it takes considerable server effort to translate between the two on the fly. If Microsoft shoots itself in the foot by killing off all this revenue it has the extra cost of translating when it meets a SIP world, or is SIP in fact dead because of this deal?
We might argue that this is all enterprise and that what Microsoft is really trying to do is keep up with Apple and Google who are targeting the humble consumer. Well there may be something in this. Before WP7, in all the prior Windows Mobile systems, Microsoft harked back to it enterprise assets and that helped deliver its failure with consumers. It was obsessed with Excel spreadsheets on a phone. Mobile needed systems which were developed for mobile, not transported from a PC. But Skype isn’t such a system. It requires P2P to drive it with processing power and that comes from PCs. The Skype system on a cellular handset relies on the processing power of these PCs. If Skype on the PC stopped working then all Skype on cellular handsets would be dead the next second, losing its directory and routing data. Skype has been adapted for cellular and may have an even bigger home on tablets, but it was never written with the mobile in mind and it can easily be overtaken.
Perhaps that’s why at Faultline we have the perception that less and less people use Skype every day or use it less regularly, mostly for overseas connections when they would otherwise rely on expensive cellular international roaming.
No, the Microsoft of today has lost two things, the ability to write rock hard resilient code quickly and all suggestions that the company is cool. In buying Skype it gets an operation that does not care about all the other Microsoft products when it writes its code (but it will have to in future) and it has a cool brand, although that brand, in the mobile touch screen Facebook era has become somewhat tarnished and past its sell by date.
It’s not even as if Microsoft will stop Skype going on other non-Microsoft clients ‘ and Skype will be just as much an advantage to Android as it will to WP7 because it has promised that it will continue supporting non-Microsoft clients. If it took a page out of Apple’s book, it might force people onto Microsoft architectures.
Finally the idea that Microsoft, already an investor in Facebook, can persuade it to drop its own Facebook VoIP product, and take Skype, is perhaps disingenuous. Microsoft bought 1.6% of Facebook for $240 million but that doesn’t give it a right to direct strategy. Sure Facebook may have wanted Skype for itself but it has demonstrated VoIP technology of its own, and anyway this is not a tough service to write software for. It can easily partner with someone who already has the technology. Skype would have been a shortcut and perhaps the fact that Facebook was talking to Skype drove the auction value, with Google then stepping in and Microsoft’s Ballmer unable to stomach losing out to Google in another bidding war, as it has done more than a few times in the past.
Could Microsoft talk Facebook into using Skype for its VoIP and video conferencing? Well Facebook would exact a huge price for this. It has 500 million active users to Skype’s 160 million, it is the company on the rise here. It has a bigger Brand than Skype and needs no help being cool. It might be possible, but why would Facebook tie itself into purely Microsoft technology (although it does have a search relationship with Microsoft)?
Facebook might make interfacing to the technology it finally chooses, easy for Skype and in that way both do a favor for its tiny shareholder and at the same time benefit from the Skype base, but beyond that we cannot see the motivation to get too close to Microsoft.
One analyst thought that using Facebook Credits to buy SkypeOut credit would be cool, but that’s as we say, a benefit bestowed by Facebook to Skype, not the other way around. We think that Microsoft would have to make a very generous deal to get Facebook to adopt Skype and under such terms how would it regain that $8.5 billion in cash.
Microsoft has wall to wall cash, and if it doesn’t spend it on something, it has to give it back to shareholders, so to someone like Ballmer this can be seen as an opportunistic way of preventing rivals from progress, but we can see this as little more than an albatross round the neck of Microsoft. The only bigger albatross is the senior management who thought this was a good deal.